America & # 39; s largest telecom operator, AT&T (NYSE :), turned out to be a profitable bet in 2019. Despite concerns about future growth and the stiff competitive environment in which it operates, its shares currently have $ 37, 32, about 31% won this year better than the 24% increase in the reference index.
However, this recovery, which partly reflects a favorable environment for dividend-paying stocks, does not solve the fundamental challenges that this telecom conglomerate faces: how to produce growth when core businesses are struggling and how to manage the huge debt burden.
The recent involvement of an activist investor, Elliott Management Corp., a hedge fund with a stake of $ 3.2 billion in the company, has provided a lot of feed to some analysts who are building a rather bullish case for AT&T.
After openly criticizing CEO Randall Stephenson for his blockbuster acquisitions, including the $ 85 billion deal to buy Time Warner assets, the hedge fund appears to have succeeded in putting pressure on the management to change its strategy to adapt and stay away from a new mega acquisition.
AT & T & # 39; s & # 39; peace agreement & # 39; with Elliott, an aggressive investment fund led by billionaire Paul Singer, includes an obligation to buy back shares and a plan to appoint two new directors to the board. As part of this ceasefire, AT&T also promised to conduct an evaluation of its portfolio and to pay off debts from the acquisition of Time Warner in 2018.
The telecom giant also agreed to separate the roles of chairman and CEO when Stephenson, aged 59, retires. He has led AT&T since 2007 and had recently discussed stepping out next year, according to a report in The Wall Street Journal.
A Long Bumpy Drive
The company's three-year capital allocation plan that was released in October also offered visibility and was loved by many analysts. The commitment to abolish all debt resulting from the purchase of Time Warner, together with a plan to spend 50% -70% of its free cash flow after dividend payments on the purchase of treasury shares, are some of the movements that AT & T & # 39; s shares can drive higher and help the company return to a sustainable growth path.
But these forward-looking details do not detract from the fact that AT&T is struggling in many areas of its business and that its turnaround is still facing a long bumpy ride. AT&T made a profit of $ 3.7 billion in the third quarter, a decrease of 22% compared to the same period a year ago. Sales decreased 2.5% to $ 44.6 billion, with widespread weakness in all business units.
In the quarter, the AT&T entertainment unit left 1.4 million pay TV customers, including 1.2 million satellite and fiber optic TV customers and 195,000 subscribers to AT&T TV Now, the online channel bundle that was once called DirecTV Now .
To address this ongoing shift from entertainment consumers to video streaming providers, AT&T is launching its own service, HBO Max, next year by packaging content from its Time Warner assets and the premium film and TV brands it owns , such as & # 39; Friends & # 39 ;.
In a market that is crowded by new players who want to challenge the dominance of Netflix (NASDAQ :), it is hard to predict how well AT&T will do. However, AT&T expects the new service to reach 50 million domestic subscribers in the next five years, as it competes directly with other media giants such as Disney (NYSE :), Apple (NASDAQ 🙂 and Amazon (NASDAQ :).
Bottom Line
The recovery in AT&T shares this year is the result of a combination of factors, including high demand for dividend shares, some improvement in cash position, and the involvement of an activist investor known to change companies with problems to strengthen their share values.
But in our opinion, that recovery is not yet a guarantee for a sustainable change, only because of the very complex nature of the challenges that AT&T faces. For that reason, the stock remains a speculative bet.
That said, AT&T is one of the most held shares among institutional investors who have their eye on the hefty payout of the company. With an annual yield of 5.46%, with an annual payout of $ 2.04, when savings accounts pay close to zero, that attraction alone could be a major deciding factor for buying the shares of the controversial telecom.
